You are viewing the chat in desktop mode. Click here to switch to mobile view.
X
Return toRoger Conrad's Utility Investor
Conrad's Utility Investor Online Chat
powered byJotCast
AvatarRoger Conrad
1:59
Hi everyone and welcome to our quarterly on-line chat for Conrad's Utility Investor readers. I look forward to taking your questions.
2:01
A couple of ground rules before we begin. First, there is no audio. Type in your questions and I'll get to them as soon as is humanly possible. I plan to keep this chat open so long as there are questions in the queue, as well as unanswered emails from the pile I received prior to the chat. Also note that there will be a published transcript on the CUI website shortly following the close of the chat, so if you have to leave before we're finished you. You'll receive a notification it's ready via email.
Thanks again for tuning in today.
2:02
First, a question or two from the email pile:
Q. I’m just curious if you have any thoughts on the Buckeye Partners (NYSE: BPL) sale?  I know you advised people to sell a while ago.  I sold some shares, but kept some too.  Would this be a good time to unload the rest? Thanks,--Lorraine G.

A. The offer price from Australian privately held infrastructure investor IFN is $41.50 per unit. Buckeye units have slipped a little below that now, but I think they’re still close enough to that for anyone holding them to sell. First, there’s still very limited upside to that point.

Second and more importantly, if for some reason this deal falls through or the offer is reduced, I think Buckeye is probably headed for the high 20s. The partnership’s first quarter results highlighted the fact that pressure on revenue and cash flow continues, mostly from the remaining storage business but now even in the once core refined products pipelines, where EBITDA dropped even with volumes and tariffs moving marginally higher.
The bottom line is Buckeye’s underlying business still hasn’t found a bottom and IFN is paying a high price (27.5% premium to the pre deal level) to buy US energy assets. Understandably, they have an incentive to given the regulatory uncertainty in Australia, where the newly re-elected Liberal/National coalition government will be trying to push down rates while Labor Party controlled states push a transition to renewable energy. But if IFN should walk away for any reason it would be very bad for Buckeye unitholders who try to hang on for the remaining pennies.

Note that I highlight the Buckeye situation in considerably more detail in the May 13 Income Insights “Big Money Now Finds Value in Energy.”
2:03
Q. Thanks for your continuing work at Capitalist Times, and the latest issues of Energy and Income Advisor and Conrad’s Utility Investor.  I appreciate the global review in the latter, having a modest proportion of our assets in securities abroad. On page 3 of Utility Investor Issue 70, you review aggressive holdings abroad, including those priced in Hong Kong dollars:

"Chinese stocks like CLP Holdings (Hong Kong: 2, OTC: CLPHY) and China Mobile (Hong Kong: 941, OTC: NYSE: CHL) are priced in a currency that’s pegged to the US dollar. As a result, there’s no real currency risk for US investors.”

This caught my eye, given an article in the Wall Street Journal on April 25th, in which Kyle Bass of Hayman Capital Management views Hong Kong’s currency peg at risk. Cited in the article is the limited ability of the Hong Kong Monetary Authority (HKMA) to defend the currency.
The Journal earlier reported that HKMA sold $692 million US$ and bought HK$ in March to defend the currency, and its aggregate balance has reportedly declined by some 80% since 2017.  Bass reportedly questions whether the HKMA could raise local interest rates significantly, given the recent preponderance of local mortgages indexed to one-month interbank rates. What’s your view?—Bill F.

A. That’s an excellent question in view of today’s headlines, which seem to indicate the US and China are all too ready to push the world economy off a cliff. As you point out, the Hong Kong monetary authorities have already had to take action to defend the currency’s value against speculation they’ll have to abandon the de facto peg. And as I should have made more clear, there’s no official peg between the US dollar and the actual Chinese currency, just an attempt at stability by monetary authorities that’s been remarkably successful to date.
Our view remains that there’s too much at stake for the US and China not to settle their differences, at least on a working basis. If and when that happens, I think a lot of these questions about future currency stability will go away. If things do get worse, then I think currency becomes a real risk for investors the same way stocks priced and paying dividends in say Euros already is. But let’s keep in mind that China is the world’s second largest economy, not Argentina. Sooner or later, currency swings among major nations do level out. And in the meantime, CLP and China Mobile are the kind of low risk stocks that can really pay off once headline risk from trade disputes recedes.
2:12
Q. Roger, I know that many MLPs and LPs are getting rolled up into corporations, and in most cases those of us interested in yields have been the losers. I enjoy seeing my year-end statements showing positive cash flow yield to me, yet much of it is protected by depreciation thereby a reduction in taxes owed. In your opinion which are the best ones left? I don’t mind some risk, especially with some of the drillers. I’ve been a subscriber of yours for over twenty years and follow your analyses closely.  Thanks for your help.—Steve W.

A. We’ve covered the subject of roll up or “simplification” mergers at length in CUI’s sister advisory Energy and Income Advisor. The latest involving our CUI model portfolios was the offer from UGI Corp (NYSE: UGI) for long time Aggressive Holding Amerigas Partners (NYSE: APU), the details of which I highlighted in the April 2 Alert “Amerigas Gets and Offer and We May Accept.”
2:13
The upshot of that deal as with so many others is essentially a taxable conversion to a corporation and a sizable distribution cut for those who hold on through the close, offset by the offer of a large premium relative to the pre-deal trading range. We later recommended swapping Amerigas for another propane distributor Suburban Propane Partners (NYSE: SPH) and are pleased with the results so far.

Suburban has no general partner, so a roll up is not a possibility. It may be taken over at some point, but we believe that would have to be at a large premium to the current price to succeed. Of the other MLPs in our coverage universe, Enterprise Products Partners (NYSE: EPD), Energy Transfer LP (NYSE: ET), Magellan Midstream Partners (NYSE: MMP) and NuStar Energy LP (NYSE: NS) have all merged with general partners, so there’s no change of simplification mergers there.

Plains All-American Pipeline (NYSE: PAA) is also unlikely to be rolled up, as general partner Plains GP Holdings LP (NYSE: PAGP) has already
swapped out its IDRs for shares. But even if it were, it would be one MLP buying another, so no tax hit. All of these MLPs are buys currently in our Utility Report Card.
Ray
2:13
I own both BEP and BPY. BPY now has a preferred that came out BPYPP 6.5%. I like owning some preferreds in my portfolio. Do you have any thoughts on this one.
AvatarRoger Conrad
2:15
Ray, I'm not crazy about most preferreds at this point in the market cycle. Some of the yields appear to be attractive but the payouts are mostly fixed. And you can get hit two ways, either by rising interest rates or a dip in the economy that sends money into senior investment grade fixed income.
2:16
That said, I like both Brookfield Renewable Energy Partners (also not likely to get rolled up) and Brookfield Property Partners, which we have in our CUI Plus Portfolio. Both are set to grow by adding assets even if the economy slows and borrowing costs tick up a bit. But the benefit of that growth is going to skew to the equities, not the preferreds.
2:18
As you know, we do have a designated fixed income portfolio in CUI that I generally report on every month or so. You can expect another as a Utility Roundup by the end of May. In fixed income, I like the short dated bonds that limit both credit and rate risk. But i do continue to look at preferreds for the right entry point and this is a family I'd be tempted to buy from.
Frank
2:18
Thoughts on CPLP/DSSI and dividends there of
AvatarRoger Conrad
2:21
Frank, I like this spinoff and merger to create a more streamlined Capital Product Partners LP (NSDQ: CPLP) and Diamond S Shipping (NYSE: DSSI), mainly because it creates larger and stronger companies that are better able to weather a glutted market for global ships. We now know what spun off/reverse spilt CPLP is going to pay in quarterly dividends, but Diamond S from its Q1 earnings call appears to be a lot more interested in using cash for growth.
2:25
That's understandable considering this business is likely to be focused on cost cutting and delevering for some time, as pressure on rates continues the next several years. This is a business that's historically been very generous to shareholders in terms of paying dividends. But management didn't talk about a payout in the conference call. Our advice on these names is you're going to have to be very patient to hold them, which is actually positive relative to sell recommendations we've had for a while on most tankers.
Hans
2:25
Gold has not done much lately, what do you suggest I do with BTG and UGL still hold on to them.
AvatarRoger Conrad
2:28
We would continue to hold onto them. BTG's 12-month return is actually zero, while UGL is lower by around 8%. But we believe odds favor gold prices moving a lot higher in the next 3 to 5 years. And when it does move, it goes fast.
RBB
2:28
Do you have a position in regards to Newt Gingrich's report about the current government missteps implementing 5G; suggesting that the U S would be out of sync with the global market by not providing the public the use of the spectrum currently allocated to the DOD . . .as well as suggesting that the business model should include the business model embraced by the utility sector (allowing more open competition on the wholesale platform)?
AvatarRoger Conrad
2:34
The US "model" if you will for 5-G development is it will be built by industry, rather than government action or subsidy. Certainly, Verizon, AT&T et al are likely to welcome an auction of such valuable spectrum. But judging from progress made so far on deployment, I doubt they need it to move forward with deployment goals. It's true that rural areas and small towns are going to get the service after major cities, just as they did with 4-G wireless and fiber. That's just simple economics--you can get a much bigger return on investment building where there are more people. But if now almost universal 4-G is a model, it will happen without too long a lag, unless of course government does something to discourage investment.
2:39
I admit I haven't read much about Mr Gingrich's plan. But there are certainly many cautionary tales from the utility sector about wholesale markets in electricity. Leaving aside what happened with Enron, only a handful of states at this point don't use a vertical monopoly model. And subsidies enacted in Connecticut, Illinois, New Jersey and New York to keep nuclear plants open--and in all but a handful of states the Renewable Portfolio Standards requiring use of wind and solar--are a pretty clear sign regulation is alive everywhere else as well.
2:42
I would hardly call that embracing open competition. But in any case, any proposal requiring companies building 5-G to open their networks on a wholesale basis would have one very predictable effect--dramatically curtailed investment in 5-G as companies deployed capital elsewhere.
Rob
2:42
Mr Conrad, always appreciate your insights and feel comfortable with the portion of my portfolio dedicated to your service. I do have a couple of preferred stock holdings outside your coverage (Golar LNG & GasLog Partners) where i'd be curious to read your thoughts. It appears both are now trading slightly under par again w high yields. Are these situations where I should hold to call or bail before they get hit by a potential slowdown?
AvatarRoger Conrad
2:45
Both Golar LNG and GasLog Partners are facing tough market conditions, brought on by a glut of shipping capacity that's outrun for now growth in LNG shipping. Like I said, I don't think the US/China trade war is going to wind up doing permanent damage to the global economy. But at this point, LNG is a major potential export from the US to China, and is therefore at risk to more tit for tat actions on both sides. That's another headache these MLPs don't need as they remain virtually shut out of capital markets and as distribution coverage tightens. We've already seen a steep payout cut at Golar, GasLog has frozen its payout now for two quarters.
2:48
Both are likely to be at growing risk to further cuts as contracts expire. My rule on fixed income is not to buy any bond or preferred of a company I wouldn't want to own the common equity of. When I've abandoned that principal, I've been burned, sometimes badly. I don't believe the preferreds here are at any risk of distribution cuts for the next 12 to 18 months. But again, business isn't good and until it is, there's always the risk something worse will go wrong. And there's no potential upside from distribution increases with preferreds either.
Richard
2:48
Should we be feeling better about SO as vogtle moves along?
AvatarRoger Conrad
2:52
I think so. I thought their Q1 was very solid and was encouraged by the progress report for Vogtle. There's still a lot of heavy lifting to do here for this project. But I think if Southern can keep the project to the same general schedule and budget more or less for the rest of this year, it will be out of the woods. I still don't intend to raise our buy target past 50 in the near term, meaning don't buy it now unless you're in a dividend reinvestment plan as I am. I think these last few weeks of gains are much more related to the sector than to the company's underlying value. But I certainly would like this stock on any dip to 50 or lower, which I think would happen if money starts to come out of utility stock ETFs at some point.
Lee
2:53
thoughts on the coal ash cost recovery issue on d. thanks
AvatarRoger Conrad
2:58
I think the most affected companies--Dominion Energy (NYSE: D), Duke Energy (NYSE: DUK) and Southern Company (NYSE: SO)--will be able to recover enough of what they spend in rate base to stay healthy, possibly with a very modest return on investment. That's mainly because they operate in states where, despite some very vocal opposition to pushing cleanup costs into rates, there's acknowledgement that the coal power plants creating the ash did provide cheap energy for many years that was critical to these states' growth, and that punitive measures would eventually push rates even higher.
3:01
The companies won't get all they want. But even in North Carolina where regulators are requiring a $10.6 bil program for Duke, we're only seeing about $500 mil disputed. That's not an amount big enough to knock Duke much off guidance or planned dividend growth, which is of course our primary concern as investors. The Virginia AG, meanwhile, is challenging cost recovery of a containment system built in 2015, which may trigger a writeoff there. But again, we're not talking about enough dollars to change the investment thesis for either company.
3:03
i do think coal ash pond cleanup costs pretty much doom new coal-fired power plants in the--if there was still any possibility one would be built anyway. I also think we can look forward to the continued acceleration of coal power shutdowns across the country.
Ben
3:04
Any thoughts on VOD?  Stock is down from 70 years ago.  

Cheap?  Value trap?
AvatarRoger Conrad
3:09
Really good question. This is a stock I've held off an on in model portfolios for more than 30 years. My result has pretty much been the same every time: Buy in, watch it go down and rebound and then sell. It's never really hurt or helped as far as I can remember. Ironically, the company's biggest problem over the years is what initially attracted me to it: A portfolio of solid franchises serving some of the world's fastest growing countries. There have been some massive success stories--India may be one the next couple years. But there's always been enough underperforming divisions to drag down overall performance.
3:12
Now it appears that despite generating EUR7.8 bil in free cash flow the last 12 months--3 times current dividends--that management will cut the dividend almost in half that's payable in August, so it can "attract another type of buyer." Initial reaction is not surprisingly a decided thumbs down from investors as the US dollar price of shares slipped under $16 today. I suppose we'll hear a lot the next few weeks about how this will preserve cash to cut debt. To me, it's just another flip flop for a chronic underperformer.
Bill G
3:12
Dear Roger:
I'm trying to get interested in PEGI.
BUT looking at their possible eps for 2019, and 2020
at -.23, and +.07 respectively after $1.66 for 2018
I don't see this as a good "bet" going forward?
AvatarRoger Conrad
3:17
First off, Pattern Energy Group (NSDQ: PEGI) like all yieldcos pays its dividend from cash flow, rather than earnings per share under Generally Accepted Accounting Principles.  By that measure, it has consistently generated strong growth, with cash available for distribution increasing 23% in Q1 from a year ago, even with soft weather conditions holding production at its wind facilities to 92% of the long term average. This figure should fluctuate around average (100%) going forward, so we should expect more growth later this year from alone, and further as new assets enter service. it's interesting you bring up EPS, which does not take into consideration the tax advantages Pattern has and therefore presents a misleading picture.
3:22
Numbers generated by big screen services of course use only GAAP generated EPS and are widely followed. That no doubt accounts for the fact that PEGI still trades at a low enough price to yield nearly 8%. The primary risk to that yield is poor performance of power plants and the inability to grow through the relationship with Pattern Development. This is not a regulated utility, which is why we hold it in the Aggressive Holdings. Also it's priced above our recommended entry point of 20.
Load More Messages
Connecting…